Wednesday, January 30, 2008

Executive Order on Financial Literacy

Given all the mayhem surrounding the mini-puke and elevated volatility in markets, rising inflation, the impending recession, largest emergency Fed rate cuts in 25 years , the large emergency fiscal stimulus package, falling housing prices, and the huge write-offs by core financial market participants, you will glad to know that Administration is on the ball, and in response to all the mayhem, the President has signed an Executive Order on January 22, 2008 Establishing an Advisory Council on Financial Literacy. No I am not making this up. This is NOT an executive order to promote Financial Literacy. No, it's essentially setting up a breakfast club to find out precisely how financially illiterate The People are, and to discuss and advise the Executive on how to redress whatever deficiencies in financial education are found. Hmmmm.
At first glance, this seems like a stupid AND REDUNDANT undertaking if ever there were one. OF COURSE AMERICA IS CHALLENGED IN TERMS OF FINANCIAL LITERACY! JUST LOOK AT THE STATE OF THE NATION! On the other hand, it might be a worthwhile exercise to find out PRECISELY HOW FINANCIALLY ILLITERATE American actually is.

The first place that might be worthy of investigation is the White House itself, for this be a primary font of partisan economic "Eat your cake and have it too-ism". Congress surely is worthy of a survey to find out just how competent in fact our lawmakers are in matters of money and finance (outside their pay packets) though anecdotal assessment of policies during the past eight years would certainly cast doubt upon any assertions that they are in any way more adept with numbers than the rest of polity. And what of The Fed itself? Should the panel consider whether the Chairman himself, despite advanced degrees and tenured faculty position at Princeton, is perhaps financially challenged given his support of "The Savings Glut" Theory for imbalances, and his somewhat peculiar and contentious hair-trigger notions that dropping money from Helicopters might be the best answer to certain financial woes facing the nation, or whose past Chairman not only dared, but positively encouraged homeowners to swap their already low and certain 30yr fixed-rate mortgages for ARMs set at absurdly-low (albeit temporary) teaser rates when he himself was on the verge of raising the rates upon which the teasers were set?? And then we have The People themselves, who by comparison, look to be the most financially literate of the lot, many of whom saw a free-lunch, and seized upon it to "take-the-money" and run, leaving the bag-holders with the problem of considering whether the shitbox upon which they lent profusively and without due-diligence was worth anywhere near what was lent, or whether said borrows even existed. They also seem to be the sdharper of the sticks insofar as they intuitively understand that saving is way sub-optimal under an official regime of monetary debasement. This most certainly explains why savings rates are negative: only a fool would save when real rates are so obviously negative, and American's, call them what you like, are no fools....(I think). I am certain you will be as keen to see who is appointed to the panel , as well as the results of their findings, for numbers will, as they say, speak volumes....if of course they ask the right questions!

The Actual Executive Order (linked above is spelled out below):

Executive Order: Establishing the President's Advisory Council on Financial Literacy

White House News

By the authority vested in me as President by the Constitution and the laws of the United States of America and to promote and enhance financial literacy among the American people, it is hereby ordered as follows:

Section 1. Policy. To help keep America competitive and assist the American people in understanding and addressing financial matters, it is the policy of the Federal Government to encourage financial literacy among the American people.

Sec. 2. Establishment of the Council. There is established within the Department of the Treasury the President's Advisory Council on Financial Literacy (Council).

Sec. 3. Membership and Operation of the Council. (a) The Council shall consist of 19 members appointed by the President from among individuals not employed by the Federal Government, consistent with subsection (b) of this section.

(b) In selecting individuals for appointment to the Council, appropriate consideration should be given to selection of individuals with backgrounds as providers of, consumers of, promoters of access to, and educators with respect to financial education and financial services. Each individual member of the Council will serve as a representative of his or her industry, trade group, public interest group, or other organization or group. The composition of the Council will reflect the views of diverse stakeholders.

(c) The President shall designate a Chair and a Vice Chair from among the members of the Council.

(d) Subject to the direction of the Secretary of the Treasury (Secretary), the Chair shall convene and preside at meetings of the Council, determine its agenda, direct its work, and, as appropriate to deal with particular subject matters, establish and direct the work of subgroups of the Council that shall consist exclusively of members of the Council.

(e) The Vice Chair shall perform:

(i) the duties of the Chair when the position of Chair is vacant; and

(ii) such other functions as the Chair may from time to time assign.

Sec. 4. Functions of the Council. To assist in implementing the policy set forth in section 1 of this order, the Council shall:

(a) obtain information and advice concerning financial literacy as appropriate in the course of its work from:

(i) officers and employees of executive departments and agencies (including members of the Financial Literacy and Education Commission), unless otherwise directed by the head of the department or agency;

(ii) State, local, territorial, and tribal officials;

(iii) providers of, consumers of, promoters of access to, and educators with respect to financial services;

(iv) experts on matters relating to the policy set forth in section 1; and

(v) such other individuals as the Secretary may direct;

(b) advise the President and the Secretary consistent with this order on means to implement effectively the policy set forth in section 1, including by providing advice on means to:

(i) improve financial education efforts for youth in school and for adults in the workplace;

(ii) promote effective access to financial services, especially for those without access to such services;

(iii) establish effective measures of national financial literacy;

(iv) conduct research on financial knowledge, including the collection of data on the extent of financial knowledge of individuals; and

(v) strengthen and coordinate public and private sector financial education programs; and

(c) periodically report to the President, through the Secretary, on:

(i) the status of financial literacy in the United States;

(ii) progress made in implementing the policy set forth in section 1 of this order; and

(iii) recommendations on means to further implement the policy set forth in section 1 of this order, including with respect to the matters set forth in subsection (b)(i) through (v) of this section.

Sec. 5. Administration of the Council. (a) To the extent permitted by law, the Department of the Treasury shall provide funding and administrative support for the Council, as determined by the Secretary, to implement this order.

(b) The heads of executive departments and agencies shall provide, as appropriate and to the extent permitted by law, such assistance and information to the Council as the Secretary may request to implement this order.

(c) Members of the Council:

(i) shall serve without any compensation for their work on the Council; and

(ii) while engaged in the work of the Council, may be allowed travel expenses, including per diem in lieu of subsistence, as authorized by law for persons serving intermittently in the Government (5 U.S.C. 5701-5707), consistent with the availability of funds.

(d) The Secretary shall designate an officer or employee of the United States within the Department of the Treasury to serve as an Executive Director to supervise the administrative support for the Council.

Sec. 6. Termination of the Council. Unless extended by the President, the Council shall terminate 2 years from the date of this order.

Sec. 7. General Provisions. (a) Insofar as the Federal Advisory Committee Act, as amended (5 U.S.C. App.) (Act), may apply to the Council, any functions of the President under the Act, except for those in section 6 of the Act, shall be performed by the Secretary in accordance with the guidelines issued by the Administrator of General Services.

(b) Nothing in this order shall be construed to impair or otherwise affect:

(i) authority granted by law to a department or agency or the head thereof; or

(ii) functions of the Director of the Office of Management and Budget relating to budget, administrative, or legislative proposals.

(c) This order shall be implemented consistent with applicable law and subject to the availability of appropriations.

(d) This order is not intended to, and does not, create any right or benefit, substantive or procedural, enforceable at law or in equity, by any party against the United States, its departments, agencies, or entities, its officers, employees, or agents, or any other person.


January 22, 2008.
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Anonymous said...

Dear C: Here's the problem: 18 of the members will be Arthur Laffer, the 19th will be Larry Kudlow. "Litereracy" of course, has never been the problem, but ideology. Sorry to rush off, but I hear choppers comin'in.

"Cassandra" said...

Oh there certainly is no shortage of lackeys, apologists, and stooges for the vacancies.

I remain fascinated though somewhat troubled by the idea that The American Consumer, is, rather than a mindless, self-absorbed gluttonous consumptive tornado, an uber-rationalist who intuitively knows "Savings is for Suckers", at least under the post-Volcker regime as we've known it, and so has leveraged and "spent forward" as much as is worldly possible.

Anonymous said...

While I am hesitant lest I abuse the welcome of
your comment space, let me make the following observation.
In the middle ages, when the King organized a hunt, it was unlike hunting today. The Sovereign and his retinue occupied a clearing at the border of a forest, which constituted the bottom of an inverted pyramid. On either side of said pyramid, serfs formed elongated barriers of staves and cloth. At the the upper area of this picture, beaters
drove the game into the funnel, and the slaughter
occurred at the vertex.
When Greenspan reduced rates to 1%, he was enacting the role of the beaters. Retirees with laddered CD's found their maturing investments could not be reinvested at rates to support even modest modest rates of consumption. Other savers and institutions experienced the same prospect. At that point, we were all driven towards becoming speculators, as savings lost all raison d'etre.
The results of the speculation thus promoted are today's deflating bubbles. We are now engaged in
a re-enactment of that hunt. Whether any game remains in the forest we will soon enough know.

"Cassandra" said...

Woland....nice! and please do feel encouraged to deposit whatever you might conjure.

The thing is, I actually think that inflation will NOT run away here and now in the face of the looming recession making 3% not outrageous. I just think tactically, they would have been better off waiting for the NEXT time markets puke of their own accord, and not as the result of a mimetic response to a rogue trader. BB's essentially wasted a bullet, and whether money costs 3 or 3.5 won't stop, nor even slow, the economic fallout from housing bust, tight credit , and romping energy and food prices.

Anonymous said...

I had thought there's be another bubble, either in gold (a la Mencius)or brainpower, due to flood of new credit. But instead now I think it'll be in financial crimes and hoaxes. Why? I've got a squirrel trap in our garden, and keep trapping the same squirrels all summer. Public isn't any smarter than squirrels, are they?

Anonymous said...

If you want a more pessimistic take on things, many Americans may subconsciously feel that the US is like the Austro-Hungarian Empire in 1910. So the game will be coming to an end before you know it. If you max out your credit cards with no intention of paying them off, at least you're fighting back against the rigged system.

In any case, I suspect a huge number of people will stop paying their debts come August.

Anonymous said...

Dear C: Just in case this slipped past your eagle eye, Gogle the words-Koerner painting a charge to keep. From the world of "you just can't make this stuff up." It pertains to W

Anonymous said...

Instead of kicking the US while it's down, I would suggest you all ask yourselves what's the next trade and catalyst. House prices and debt levels are much more extended in parts of Europe, Asia, and especially the UK. The US has a lot of debt, but at least has inflation (unlike Japan with 170% debt / GDP and no inflation and migration). Moreover, the collateral underlying US debt is superior to that of countries with similar debt levels. I assume financial types read this blog - well you use Microsoft Excel and Windows, Bloomberg, Sun Workstations with Intel chips, maybe you even have an Iphone??? Is there a marginal consumer outside the much-derided US consumer? Can China keep selling cheap goods and buying expensive US debt and Euros/Pound without a crisis at some point? All I'm saying is that the world is short the US as it was in the 70's, so it's discounted and time to move onto the next trade.

"Cassandra" said...

TheTom - thanks for that. Though you can't make it up, you could prolly do better than 50/50 on a test of these things and whether or not they are factually attributable.

anonymous- yes the dollar is oversold. yes the us represents great "value" (though you still have to live in an essentially dysfunctional society). yes delveraging will eventually lead to dollar strength; yes eventually America will pare back consumption as recession hits and move to greater trade balance as ag terms of trade continue to improve; UK, ireland spain and parts of suisse are elevated, but most of the continent is hardly bubbled, nor indebted. You couldn't get a new-fangled mortage in germany or france if you tried. 20% down and reasonably thorough checks have been and remain the norm. The Euro is o/v to the USD, but won't revert until it's clear rates are coming down quicker than US. The 170% to GDP for Japan is a figure for tot government debt. Combining the household, business and govt sectors (at my last gander), and Japan has substantially lower total cumulative indebtedness-to-gdp than the USA (as does Europe to theirs). We can argue that US assets are much larger (land, resources, foreign asset holdings etc.) and can therefore bear the higher leverage, but the raw govt debt figure is disingenuous comparison in itself).

Some trends longer term: How to live with lower to zero real growth in most OECD; adjustment to triple-digit oil; end of cheap food, water wars; demographic implosion in many oecd; drag of higher-taxes in US; another 30% drop in real US home prices; increasing hostility t0o globalization and incremental move towards tripolar trade-bloc world;

Anonymous said...

Thx C - but I would remind you that government debt is ultimately a claim on housedhold assets; I would assume the MoF would rather raise taxes than default. Regarding US assets, US household net-worth continues to go higher and the foreign income account was positive until recently. Americans have always been risk-takers and if the Chinese/Mideast are lending to you at 5% and you are earning 10% on your foreign investments in factories, equities, FX, and real estate, why not? That said, the trend next few years doesnt augur well and Americans will need to accept a lower real living standard. But this is not solely a US phenomenon; the middle class is under pressure everywhere and was a prominent political issue for Japan when I was there in September when Fukuda replaced Abe.

Some longer-term trends/scenarios of my own on the radar: a mega-crash in Chinese assets and attendant political unrest (much like that which ousted Chiang Kai Shek); the latter's effects on Australia and Canada's drum-tight economies; an Atlas-like exodus of rich aging boomers from higher-tax, cold countries to warm tax-havens; the repatriation of Yen to fund Japan's retirees' sunset years; energy-efficient innovation and companies in the US like Japan since 70's (finally); the effect of an (eventual) commodity bust on GCC labor markets during the demographic bulge of 18-30 year-old Arab males; and the pressure on equity risk premiums/cost of K/real rates as USD,EUR,JPY retirees shift asset classes.

Along these lines, an interesting anecdote I must share since you focus on Japan: Institutional Investor recently released some rubbish on "The 75 most influential people in finance". paging through it, I noticed 4 out of the top ten were Chinese yet only 2-3 out of the 75 were from Japan. There has been too much excess built in China, misallocation of capital, and too much capital chasing too few opportunities. Similarly, Japan has long been ignored and the small-caps are now almost back to 2003 deflation levels. I believe the China crash will be the buying opportunity of a lifetime, much like US during panic of 1907 a century ago. Until then, I won't put a dime in China and continue to quietly accumulate Nikkei and JPY in my PA on dips.